PRB assessment report of Performance Plans for RP1. Denmark-Sweden. Prepared by the Performance Review Body (PRB) of the Single European Sky

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1 Performance Review Body EUROCONTROL PRB assessment report of Performance Plans for RP1 Prepared by the Performance Review Body (PRB) of the Single European Sky 20 September 2011

2 COPYRIGHT NOTICE AND DISCLAIMER EUROCONTROL This document is published by the Performance Review Commission (PRC) in its role as Performance Review Body (PRB) to assist the European Commission in the implementation of the Performance Scheme. It may be copied in whole or in part providing that the copyright notice and disclaimer are included. The information contained in this document may not be modified without prior written permission from the Performance Review Commission. The views expressed herein do not necessarily reflect the official views or policy of EUROCONTROL or of the European Commission, which make no warranty, either implied or express, for the information contained in this document, neither do they assume any legal liability or responsibility for the accuracy, completeness or usefulness of this information. Printed by EUROCONTROL, 96, rue de la Fusée, B-1130 Brussels, Belgium. The PRC s website address is The PRU s address is pru@eurocontrol.int.

3 TABLE OF CONTENTS 1 DENMARK-SWEDEN INTRODUCTION CURRENT SITUATION AND LEVEL OF PERFORMANCE COMPLIANCE CHECKS SAFETY ENVIRONMENT CAPACITY COST-EFFICIENCY INTERRELATIONS BETWEEN PERFORMANCE TARGETS ADDITIONAL COMMENTS ASSESSMENT CONCLUSIONS...25 ANNEX 1: TECHNICAL ASSESSMENT DASHBOARD...27 ANNEX 2: PERFORMANCE PLAN CHECKLIST...29 ANNEX 3: INVESTMENTS RELATED TO IP1 OF THE ATM MASTERPLAN...32 ANNEX 4: LIST OF UNCONTROLLABLE COSTS...33

4 1 1.1 Introduction s Performance Plan was received on 30 th June in English. It was signed by the Head of Department for the Danish Transport Authority (Denmark NSA) and the Head of Air Navigation Services, Airports and Security for the Swedish Transport Agency (Sweden NSA) Denmark and Sweden have formed the Danish-Swedish Functional Airspace Block and decided to submit a joint plan at Functional Airspace Block level. However, Denmark- Sweden s Performance Plan provides separate national targets for cost-efficiency s Performance Plan provides targets for the following accountable entities: Naviair (Denmark) and LFV (Sweden) as the designated ANSPs; The Danish Transport Authority and the Swedish Transport Agency as the nominated NSAs; The Danish Meteorological Institute as the designated MET service provider (no separate targets are provided for SMHI, the Swedish MET provider as costs are recovered through LFV); The Swedish Maritime Administration as the Swedish SAR provider; and ACR Aviation Capacity Resources, a new provider of ATS in Västerås, Växjö and Örebro (Sweden) In addition targets are included for CNS costs recovered by airports. Further, Swedish airports that provide CNS, Danish and Swedish slot coordinators and two airlines (Cimber Sterling and SAS) are also included in the list of accountable entities for the provision of data s Performance Plan covers Danish and Swedish controlled airspace. For safety, the airspace also includes the Copenhagen, Stockholm and Malmö TMAs According to Article 13 of the performance scheme Regulation 1, the PRB has assessed this plan on the basis of the criteria laid down in Annex III of the same Regulation. 1.2 Current situation and level of performance Denmark The global economic crisis led to a decline of -5.2% in GDP in 2009, but 2010 saw a partial recovery to 2.1% growth and 1.7% of growth is forecast during Denmark s price inflation was 1.1% in 2009, reflecting the economic downturn. In 2010 it grew to 2.3% and IMF forecast 2.0% price inflation in P GDP (%) -5.2% 2.1% 1.7% Price inflation (%) Exchange rate to 1.1% 2.3% 2.0% Government 3.6% 2.9% 3.2% Commission Regulation (EU) 691/2010 of 29 July 2010 laying down a performance scheme for air navigation services and network functions. Source: European Economic Forecast (Spring 2011). Source IMF April 2011 Forecast, Average. 3

5 Bond Rate % Figure 1: Key macro-economic indicators The Danish krone exchange rate to the euro has remained stable over the period Denmark s Government bond rate 4 has remained low over the period s Performance Plan contains macroeconomic data and forecasts for Denmark sourced from the Danish Ministry of Finance and Denmark s National bank. These are different from the values shown in the table above: the most significant difference is that inflation is forecast to be 1.5% in Sweden The global economic crises led to a decline of -5.3% in GDP in 2009, but 2010 saw strong recovery with 5.5% growth and 4.2% growth is forecast during Sweden s price inflation remained stable in 2009 and , and IMF forecast it to be at 2.0% in Sweden s kroner has appreciated against the euro and this trend is forecast to continue in P GDP (%) -5.3% 5.5% 4.2% Price inflation (%) Exchange rate to Government Bond Rate % 1.9% 1.9% 2.0% % 2.9% 3.3% Figure 2: Key macro-economic indicators Sweden s Government bond rate 8 has remained stable over the period s Performance Plan contains macroeconomic data and forecasts for Sweden sourced from Statistics Sweden, National Mediation Office, The Swedish Debt Office and NIER. These significantly differ from those in the table above: in particular, inflation for 2011 is forecast to be 3.2%, and GDP growth 4.2% Naviair and LFV are the designated ANS providers in Denmark and Sweden respectively. However, s Performance Plan states that terminal service providers can also recover part of their costs through the en-route cost base (for Denmark, costs for services between 20km from the airport and the edge of the TMA, and for Sweden, costs for services between 13km from the airport at the edge of the TMA). Swedavia is listed as an accountable entity for en-route but no cost figures or targets are provided In combination Naviair (1.6%) and LFV (2.4%) (DK/SE FAB) is a medium sized ANSP with costs amounting to 4.0% of the EU29 gate-to-gate ATM/CNS provision costs in Source European Central Bank long term bond rates (10 years) collected for convergence reasons, monthly average, for 2011, 5 months only. Source: European Economic Forecast (Spring 2011). Source: Eurostat HICP all items. Source IMF April 2011 Forecast, Average. Source European Central Bank long term bond rates (10 years) collected for convergence reasons, monthly average, for 2011, 5 months only. 4

6 2009. En-route ATFM delays in DK/SE airspace were 0.4% of the total in the EU29 as shown in Figure 3. Traffic complexity levels are relatively low is SE but intermediate in DK and seasonal variability low across the DK/SE FAB. Gate-to-gate ATM/CNS costs 4.0% Flight-hours controlled by the ANSP 4.9% En-route ATFM delay 0.4% 96.0% DK-SE EU % DK-SE EU % DK-SE EU 29 Figure 3: DK-SE FAB's Key Figures (ACE 2009) Figure 4 shows that IFR traffic projections for Denmark and Sweden show similar patters In Danish and Swedish airspace IFR movements declined sharply in 2009, and remained below 2008 levels in Although the Feb./May 2011 STATFOR Forecast expects IFR movements to recover, the current forecast traffic for 2014 is what was previously forecast for 2009 (i.e. a five years shift of traffic) The Thales Eurocat system used within COOPANS will be upgraded during , which it is envisaged may lead to temporarily higher delays during this period. IFR movements ('000) IFR movements ('000) , STATFOR MTF Feb vs. May Denmark ACTUAL Feb ( B ) May 2011 ( B ) STATFOR MTF Feb vs. May Sweden ACTUAL Feb ( B ) May 2011 ( B ) Figure 4: STATFOR February 2008 base case and Feb./May 2011 Base case forecasts s Performance Plan does not provide information on the Danish and Swedish FAB s current safety performance monitoring capabilities, neither at the FAB level or the national level. Nevertheless, based on LSSIP ( ), both Danish and Swedish NSAs have procedures and resources in place to perform safety performance monitoring. 5

7 The Swedish NSA (Swedish Transport Agency) has a mechanism to collect, evaluate, process and store occurrences in aviation (including ATM). According to the LSSIP the Aviation Act was updated in September 2010 and Just Culture is ensured In Sweden the monitoring against the established acceptable safety levels is pending the establishment of acceptable levels of safety ( s Performance Plan). In addition, the Swedish NSA has reported a limited number of personnel dealing with safety oversight and performance tasks (LSSIP ) The Danish NSA (SLV) monitors a series of 20 indicators that cover all aspects of aviation, some of which are related to ATM (Runway Incursions, TCAS alerts), however, these indicators are not monitored against acceptable levels of safety as this is not yet established. The Danish ANSP (NAVIAIR) has established some tolerable levels of safety in terms of a maximum number of incidents, severity category A and B, for any one year period (LSSIP ) Figure 5 shows historical en-route ATFM delays per cause for FAB DK-SE. In 2008, Denmark experienced a large increase in ATFM en-route delay per flight, the main cause being transition problems with a new ATM system. Corresponding with a decline in traffic during 2009 and 2010, delays reduced to a negligible level. ATFM en-route delay/ flight (min.) DK-SE ATC Capacity/ Staffing [C,S] ATC Other (strike, equipment, etc.) Weather [W] Other (special event, military, etc.) Traffic index (2006) Figure 5: Historical ATFM delays per cause index In Sweden, delays have been relatively low over the period. However, in 2010 there has been an increase in delays caused by staffing issues at Stockholm ACC Over the early part of the period shown in Figure 6, Naviair was the main contributor towards enroute ATFM delay in the DK-SE FAB. However the resolution of infrastructure problems for Naviair and staffing issues at Stockholm ACC have resulted in LFV contributing the majority towards en-route ATFM delay in the DK-SE FAB in 2009 (60%) and 2010 (92%). ATFM en-route delay/ flight (min.) DK-SE LFV NAVIAIR Traffic index (2006) Figure 6: Historical ATFM delays per Member State by FAB 102 index LFV s economic cost-effectiveness has deteriorated over the period Costs rose steadily and faster than traffic mainly due to staff costs, while productivity decreased by -6% over the period. Despite this, in 2009 LFV has the sixth lowest unit economic costs of European ANSPs. 6

8 1.3 Compliance checks s Performance Plan contains the majority of the most important information required by the legislation. However, the following required information is not provided: Status of aviation State Safety Programme for Denmark; Description of institutional context and governance arrangements; Stakeholder consultation list of stakeholders consulted and confirmation that information was provided three weeks in advance and details of stakeholders consulted; Explanation of interdependencies and trade-offs between KPIs; Description of traffic risk sharing keys; Description of incentives relating to capacity and specific incentives for each entity; Description of investments necessary to achieve the performance targets, as well as their relevance and coherence in meeting performance targets; Description of contingency plans if targets not met during the reference period In several other areas s Performance Plan contains incomplete information full details are provided in Annex 2. The s Performance Plan should be updated to contain the missing information listed in Section Safety s Performance Plan contains the following information concerning safety Performance Indicators: evidence is presented that Effectiveness of Safety Management (EoSM), Just Culture (JC) and application of Risk Assessment Tool (RAT) indicators will be monitored in RP1. Safety targets are established at FAB level for en-route separation minima infringements per 100,000 flying hours with a corresponding threshold of +5%. The baseline for safety target has been computed on the average of four years ( ). It is not clear whether RAT tool/methodology is/will be in use. Safety incidents are classified according to ESARR 2. In Sweden, a State Safety Programme is established, however the national Acceptable Level of Safety (ALoS) is under development (LSSIP Level 2 ( )). In Denmark the national Acceptable Levels of Safety is not established or implemented yet. Denmark awaits the introduction of a pan-european scheme (LSSIP Level 2 ( )) It must be noted that the cover letter of s Performance Plan states that the Swedish NSA states that the targets declared in s Performance Plan will not be applicable in Swedish airspace until the enclosed decision has gained legal force in accordance with Swedish administrative law The PRB has the following Safety observations for Denmark in relation to the Denmark- Sweden FAB Performance Plan: 7

9 The LSSIP describes a significant number of activities related to the monitoring of performance. Denmark has necessary procedures and resources to perform performance monitoring. A sound process exists within SLV for monitoring safety trends and key risk areas. Regulation EC 1315/2010 is under implementation. For the time being processes for oversight of risk assessment and mitigation are given priority (LSSIP ). A number of non-conformities between regulatory process and EC 1315/2010 requirements are still in place (LSSIP ( )) The PRB has the following Safety observations for Sweden in relation to the Denmark- Sweden FAB Performance Plan: The monitoring against the established acceptable safety levels is pending on the establishment of acceptable levels of safety (LSSIP ). The processes already exist. The Swedish NSA has insufficient personnel holding an appropriate auditor qualification; this situation will be resolved in May 2011 (LSSIP ) Key points on SAFETY: In the Performance Plan there is no description of safety performance monitoring processes and capabilities at a FAB level, however external evidence suggests a high level of competency at the National level. Therefore, it is suggested that the description of the NSAs safety performance monitoring process and capabilities should be described in the FAB performance plan, as well as how the safety performance monitoring system of two States will be organized at FAB level. The PRB would request to know the current usage or planned utilisation of RAT in Denmark (ANSP and NSA). With due regards to independence of AIB, PRB encourages Denmark to apply the RAT methodology for analysing and investigating ATM safety occurrences in all entities (not just the ones mentioned in 691/2010). The PRB would like to be informed whether the 3 safety KPIs mentioned in (EU) 691/2010 will be monitored during RP1. PRB appreciates the decision of Denmark and Sweden to establish safety targets, and invites the FAB to clarify the baseline for this target. The Performance Plan states: The baseline for the FAB becomes the average of last four years which is 1.57 incidents per 100,000 flying hours. PRB asks to obtain the following clarifications: o o o o Are "incidents" meant to be "separation minima infringements with direct ATM involvement classified according to ESARR 2 - Category A (Serious incidents) and Category B (Major incidents) by using the RAT1 tool"? Which entity decides on the direct ATM involvement (ANSP, AAIB, NSA, others)? What are the criteria to determine whether there is direct ATM involvement? Specification of the flying hours used (data source, type of flights included, etc.) PRB invites Sweden to clarify whether sufficient NSA qualified staff and organisational structure will be available to fulfil the NSA Safety tasks related to SES II during RP1, taking full advantage of the FAB structures and resources. 8

10 1.5 Environment s Performance Plan does not include any environmental targets However, s Performance Plan contains the following elements contributing to the achievement of the EU-wide target on the environment: Route improvements: According to the European ATS Route Network (ARN) Version 7, the Danish-Swedish FAB will focus on ensuring network consistency at the interface with other FABs. Free route airspace: Since 2009 LFV and Naviair have been working on introducing so-called Free Route Airspace (FRA) within the Danish-Swedish FAB. This is an initiative that will partly contribute to the EU-wide target to improve the route system by 0.75 % in 2014 compared to The FRA initiative will shorten the flight routes in the Danish-Swedish FAB by approximately 1.3 % from 2012 compared to the situation before the implementation of FRA. The relatively low percentage of improvement in flight efficiency in the Danish-Swedish FAB is a result of the already well developed route efficiency work done by the ANSPs in both countries. The PRB welcomes the introduction of free route airspace. 1.6 Capacity Figure 7 presents the delay targets proposed by Denmark and Sweden for each year of RP1 against the historical delays as well as the reference values provided by the Capacity planning process of EUROCONTROL in January En-route ATFM delay per flight (min.) 1.4 DK-SE Source: CFMU; Performance Plan Historic values Reference values Capacity target X X OK Figure 7: Capacity targets overview Delay level check in 2014: s Performance Plan includes a FAB target for capacity and individual state targets for cost-efficiency. The delay target in 2014 of 0.08 minutes per flight is equal to the reference value provided by the capacity planning process of EUROCONTROL. Therefore, it is consistent with the contribution required from the DK-SE FAB to meet the EU-wide capacity target in The intermediate values for 2012 and 2013 are considerably higher than the reference values provided by the EUROCONTROL capacity planning process and represent an increase in delay compared to 2009 and

11 s Performance Plan is assessed as passing the Delay level check s Performance Plan states that no capacity gap will exist in either Denmark or Sweden during RP According to s Performance Plan, the reason for proposing intermediate values in 2012 and 2013 which are considerably higher than those provided by the capacity planning process of EUROCONTROL is because of the forthcoming upgrade to the Thales Eurocat system (COOPANS) in , which might lead to temporarily higher levels of delay during the transition ANSP Capacity planning (LSSIP ): Figure 8 compares the required reference profile for the period to the ANSP capacity plans (LSSIP ) For both Sweden and Denmark, it shows that the respective ANSPs are planning to provide sufficient capacity with the planned capacity consistently above the required capacity throughout RP1. 30% 20% 10% 0% -10% -20% -30% ANSP capacity plans vs. required reference profile (LSSIP ) Shortfall Surplus DK-SE Denmark Sweden Figure 8: Capacity plan vs. required reference profile It must be noted that the peak traffic demand for Sweden is not in the summer. There is a peak in late spring (May June) and late summer/autumn (September October). The LSSIP is based on the summer months, however, it clearly states that no capacity problems exist for the full year Both ANSPs are planning to provide sufficient capacity for RP1. The capacity plans suggests that both ANSPs would be able to meet the capacity target even if traffic exceeds the forecast. Both capacity plans exceed the requirements of the high traffic growth capacity profile. The ANSPs latest available capacity plans (LSSIP ) are consistent with the required reference profiles and are consistent with the performance target in the submitted Performance Plan Key points on CAPACITY: A. Capacity performance has been relatively good for Sweden and Denmark since 2006, with the exception of 2008 for Denmark when a new ATM system was introduced. B. The proposed target of 0.08 minutes per flight in 2014 in s Performance Plan meets the value provided by the capacity planning process of EUROCONTROL. Therefore, the DK-SE FAB is considered to make a sufficient contribution to the achievement of the EU-wide capacity target in s Performance Plan states that no capacity gap will exist in either Denmark or Sweden during RP1. C. The ANSP s capacity plans (LSSIP ) are more ambitious than the reference capacity profile. This suggests that the good capacity performance observed since

12 (since 2006 for Sweden) should continue throughout RP1. D. The intermediate values for 2012 and 2013, however, are considerably higher than the reference values provided by the capacity planning process of EUROCONTROL and are also much higher than delays generated in 2009 and s Performance Plan states that the higher intermediate values for 2012 and 2013 are because of the forthcoming upgrade to the Thales Eurocat system (COOPANS) in , which might lead to temporarily higher levels of delay during the transition. E. The capacity target is set at FAB level, however there is no mention of the capacity target in Section 3 (Contribution of Each Accountable Entity) of s Performance Plan and hence no explicit assignment of the capacity target to an accountable entity or entities. F. The capacity target will be monitored at least yearly in 2012 and 2013 and quarterly from Cost-efficiency Danish determined unit rate Figure 9 presents the cost-efficiency targets proposed by Denmark for each year of RP1 together with the historical values since Denmark 130 Determined unit rate ( ) Traffic and cost index (2009=100) ATSP Eurocontrol MET CAA/NSA Service Units Real 2009 en-route cost 90 Components of determined unit rate Eurocontrol EUR % -1.2% ATSP EUR % -1.7% MET EUR % -4.9% CAA/NSA EUR % -2.3% Total EUR % -1.8% Figure 9: Cost-efficiency target overview (Denmark) Traffic forecast checks: As shown in Figure 10, the submitted traffic forecast is in line with STATFOR May 2011 base case for every year until 2014 (an average of +3.4% p.a. between 2009 and 2014). s Performance Plan compares STATFOR forecast with actual traffic for the years and concludes that there is no sign of systematic bias in the STATFOR forecast. 11

13 125 Denmark Index of Service Units 2009= STATFOR May 11 base STATFOR May 11 high STATFOR May 11 low STATFOR Feb 11 base STATFOR Sep 10 base Performance Plan Total en-route service units ('000) Performance Plan % 2.7% STATFOR May 11 base % 2.7% STATFOR May 11 high % 3.9% STATFOR May 11 low % 1.8% STATFOR Feb 11 base % 2.7% STATFOR Sep 10 base % 2.4% Figure 10: Traffic forecasts (Denmark) The Danish part of s Performance Plan is assessed as passing the Traffic forecast check Economic assumptions checks: As shown on Figure 11, there is an important difference in 2011 where a different forecast is used in s Performance Plan compared to the IMF (April 2011 forecasts), while for the years the inflation forecasts are in line with IMF. Overall the PRB calculates that the cumulative difference in the price base is below 1% point by Inflation Performance Plan 2.2% 1.5% 2.0% 2.0% 2.0% 1.9% 2.0% IMF April 2011 average 2.3% 2.0% 2.0% 2.0% 2.0% 2.1% 2.0% Difference (percentage points) -0.1% -0.5% 0.0% 0.0% 0.0% -0.1% 0.0% Performance Plan (index, 2009=100) IMF April 2011 average (index, 2009=100) Figure 11: Economic assumptions (Denmark) The Danish part of s Performance Plan is assessed as passing the Economic assumption check Unit rate trend checks: As summarised in Figure 12, although the forecast annual reduction in the en-route determined unit rate is significantly worse than the EU target measured over the period (-1.8% p.a. compared to -3.5%), when measured over the period, it is significantly better than the EU target (-4.1% p.a. compared to -3.2%) The PRB notes that the changes to the vember 2010 forecast improve the planned reduction in the en-route DUR, both when measured over (-4.1% p.a. compared to -3.8% p.a.) and (-1.8% p.a. compared to -1.4% p.a.). Indeed, 12

14 compared to its vember 2010 submission, Denmark has revised downwards its 2012 and 2013 en-route determined costs by -5.0% and -3.4%, respectively. Units Total determined costs (nominal terms) '000 DKK % 2.9% Inflation % % 0.0% 2.2% 1.5% 2.0% 2.0% 2.0% Inflation index (2009 = 100) % 2.0% Total determined costs (real terms) ' DKK % n/n-1 % -5.8% -0.8% 2.5% 1.3% -1.1% -0.8% 0.9% Total en-route SUs 000 SUs % n/n-1 3.8% 5.0% 4.2% 1.9% 2.1% 3.4% 2.7% En-route determined unit rate (national currency in real terms) 2009 DKK % n/n-1 % -9.3% -5.5% -1.7% -0.6% -3.1% -4.1% -1.8% 2009 Exchange rate 1 EUR= En-route determined unit rate (Euro in real terms) 2009 EUR EU-wide target % n/n-1 % -9.3% -5.5% -1.7% -0.6% -3.1% -4.1% -1.8% 2009 EUR % -3.5% Figure 12: Determined unit rate trend (Denmark) The PRB computes that if the trend in the en-route DUR was calculated taking into account the one-off adjustment to EUROCONTROL costs for 2011, the forecast annual reduction would be -2.3% p.a., that is better than the reduction in the enroute DUR presented in the Performance Plan (-1.8% p.a.). However, it would still fall short of the EU-wide cost-efficiency target (-3.5% p.a.) The PRB also notes that exceptional elements of costs were included in the 2009 cost base, but correcting for these exceptional elements shows that the cost-efficiency target measured over the period is still achieved. s Performance Plan also reports that Naviair implemented cost cutting measures in 2009 and 2010, reducing the en-route determined costs by 2.6 million While Denmark s en-route determined costs are planned to fall by -0.8% p.a. between 2009 and 2014, there are both large increases and large reductions depending on years and on cost categories. The PRB notes that by 2014, the cost of capital is planned to be 15% higher than its 2009 level, mainly due to a significantly higher capital employed (in particular a larger amount of net current assets). Index of Total Cost 2009= Staff costs Other operating costs Depreciation Cost of capital Figure 13: Costs by nature trend (Denmark) The PRB understands that the proportion of gate-to-gate costs allocated to en-route is planned to rise from some 74% in 2009 to 78% in Assuming a constant % allocated to en-route, the PRB calculates that the trend in the en-route DUR would be better than forecast in the Performance Plan (-5.3% p.a. compared to -4.1% over , and -2.2% p.a. compared to -1.8% over ) Finally, the PRB notes that the MET provider (representing 4.2% of the total determined costs in 2009) meets the target trend over (-4.4% p.a.) and also over (-4.9% p.a.). The Performance Plan indicates that the Danish and Swedish MET providers intend to form a consortium that would act as a single MET provider for the 13

15 Danish-Swedish FAB. This new arrangement would be implemented progressively over and would, according to the Performance Plan, enable cost reductions of some -15.0%. The Danish part of s Performance Plan is assessed as passing the Unit rate trend check Unit rate level checks: As shown in Figure 14, Denmark s en-route determined unit rate remains much lower than the unweighted average of the comparator States throughout the period, and adjusting for differences in PPPs, the PRB calculates that the enroute determined unit rate for Denmark in 2014 would be % lower than the unweighted average of the comparable States The difference in the en-route determined unit rate is due mostly to Naviair having lower ATCO employment costs per ATCOhour and lower support costs per composite flight-hour. However, ATCO productivity remains an area for improvement. Determined unit rate ( ) Austria Denmark Switzerland Unweighted peer group average (excl. Denmark) Figure 14: Determined unit rate level (Denmark) The Danish part of s Performance Plan is assessed as passing the Unit rate level check Return on equity checks: The average RoE forecast over the period is 5.0%. The ATSP risk premium is 1.9% which is less than the EU average for ATSPs (2.6%). Similarly, the pre-tax WACC over the period used in s Performance Plan is 4.5%, which is close to the comparator States (4.4%) and significantly below the EU average (5.9%). 10% Return on equity / state long term bond rate 9% 8% 7% 6% 5% 4% 3% 2% 1% Austro Control EU average Peer group average Skyguide NAVIAIR 0% Total assets per SU Average return on equity State long term bond rate, v Apr 2011 average (EU avg. excluding GR, IE, PT) 14

16 Figure 15: Average Return on Equity and asset base per SU (Denmark) However, the asset base per SU over the period is planned to be 118, which is 86.8% higher than the comparator States ( 63) and 126.4% higher than the EU-wide average ( 52). The PRB understands that this reflects the new capital structure of Naviair, which was transformed into a State-owned company on the 1st of January The PRB notes that the Performance Plan does not specify whether the relatively high share of current assets in the asset base (some 30%) is likely to decrease beyond Given the magnitude of the current assets it would be important to ensure that no interest bearing assets are included in the capital employed. The Danish part of s Performance Plan is assessed as passing the Return on equity check with reservations Key points on COST-EFFICIENCY for Denmark: A. Denmark s Performance Plan is assessed as passing the traffic forecast check. The traffic forecast submitted in the Denmark s Performance Plan is in line with STATFOR May 2011 base case for every year until 2014 (an average of +3.4% p.a. between 2009 and 2014). B. Denmark s Performance Plan is assessed as passing the economic assumption check. For the years the inflation forecasts are in line with IMF (April 2011 forecasts). The inflation forecast used in the Performance Plan is lower than the IMF forecast for the year However, the PRB calculates that the cumulative difference in the price base is below 1 percentage point by 2014 and this does not significantly impact the conclusions of the other checks. C. The forecast annual reduction in the en-route DUR is significantly worse than the EUwide cost-efficiency target measured over the period (-1.8% compared to - 3.5%). The PRB notes that over the period, other operating costs and the cost of capital are planned to rise respectively by +1.9% and +4.5% p.a., in real terms. The PRB understands that the rise in the cost of capital is mainly driven by the addition of DKK million (or 57.3 million) of net current assets to the asset base used for the calculation of the cost of capital in The Performance Plan does not adequately justify this uplift of Naviair s current assets although the PRB understands that this reflects the new capital structure of Naviair following its transformation into a State-owned company. D. The PRB notes that the changes to the vember 2010 forecast improve the planned reduction in the en-route DUR, both when measured over (-4.1% p.a. compared to -3.8% p.a.) and (-1.8% p.a. compared to -1.4% p.a.). Similarly, the PRB computes that if the trend in the en-route DUR was calculated taking into account the one-off adjustment to EUROCONTROL costs for 2011, the forecast annual reduction would be -2.3% p.a., that is more ambitious than the reduction in the en-route DUR presented in the Performance Plan (-1.8% p.a.). E. When measured over the period, the forecast annual reduction in the enroute DUR is significantly better than the EU-wide cost-efficiency target (-4.1% compared to -3.2%). The Performance Plan recognises that exceptional elements of costs were included in the 2009 cost base, but correcting for these exceptional elements shows that the cost-efficiency target measured over the period would still be achieved (-3.4%). The Performance Plan also reports that Naviair implemented cost-cutting measures in 2009 and 2010, reducing the en-route determined costs by 2.6 million. F. The PRB understands that the proportion of gate-to-gate costs allocated to en-route is planned to rise from some 74% in 2009 to 78% in Assuming a constant % allocated to en-route, the PRB calculates that the trend in the en-route DUR would be 15

17 better than forecast in the Performance Plan (-5.3% p.a. compared to -4.1% over , and -2.2% p.a. compared to -1.8% over ). G. After careful consideration of the key points under C to F above, Denmark s Performance Plan is assessed as passing the en-route DUR trend check. H. Denmark s Performance Plan is assessed as passing the en-route DUR level check. The en-route DUR in 2014 is forecast to be 61.42, -6.1% lower than the average of the two comparator States (Austria and Switzerland). If adjusted for differences in PPPs, the PRB calculates that the en-route DUR for Denmark in 2014 would be -18.4% lower than the unweighted average of the comparator States. I. In 2009, Naviair showed lower ATCO employment costs per ATCO-hour and lower support costs per composite flight-hour than the unweighted average of the comparator States. However, ATCO productivity was -7.5% lower than the comparator States and therefore remains an area for improvement. J. Denmark s Performance Plan is assessed as passing the return on equity check, with reservations. The average RoE forecast over the period is 5.0%. The ATSP risk premium, calculated by the PRB as the difference between the RoE and the State long-term bond rates is 1.9% (5.0% - 3.1%). This is lower than the average risk premium calculated at EU-wide level for ATSPs (2.6%). Similarly, the pre-tax WACC over the period used in the Performance Plan is 4.5%, which is close to the comparator States (4.4%) and much lower than the EU average (5.9%). However, the asset base per SU over the period is planned to be 86.8% higher than the comparator States and 126.4% higher than the EU-wide average. The PRB notes that the Performance Plan does not specify whether the relatively high share of net current assets in the asset base (some 30%) is likely to decrease beyond Given the magnitude of the current assets it would be important to ensure that no interest bearing assets are included in the capital employed. Swedish determined unit rate Figure 16 presents the cost-efficiency targets proposed by Sweden for each year of RP1 together with the historical values since

18 Sweden 135 Determined unit rate ( ) Traffic and cost index (2009=100) ATSP Eurocontrol MET 100 CAA/NSA Service Units Real 2009 en-route cost Components of determined unit rate Eurocontrol EUR % 0.1% ATSP EUR % -3.6% MET EUR % -3.8% CAA/NSA EUR % -3.2% Total EUR % -3.3% Figure 16: Cost-efficiency target overview (Sweden) Traffic forecast checks: As shown in Figure 17, the traffic forecasts provided in s Performance Plan are the February 2011 forecast from the Swedish Transport Agency, which are very close to STATFOR February 2011 forecast, but slightly less optimistic than the STATFOR May 2011 baseline scenario. Information from the CRCO s monthly monitoring of traffic (see charts below) indicates that actual traffic in the first seven months of 2011 is +10.1% higher compared to the same period in 2010 (+7% excluding April data due to the Volcanic ash crisis in 2010). This is much higher than the planned increase in TSUs reported in the Performance Plan for 2011 (+5.8%). Sweden s forecasts are some -1.2 percentage point below STATFOR base case forecast for every year , and the Performance Plan does not provide robust evidence to justify a deviation from the STATFOR May 2011 base case scenario. Given that the SU forecast used by Sweden is systematically -1.2% below STATFOR May 2011 baseline forecast throughout RP1, and given the traffic risk sharing, the Swedish en-route ATSP (LVF) could collect revenues exceeding its determined costs without having to return these revenues to airspace users (estimated at some 2.3 million per year). 17

19 130 Sweden 125 Index of Service Units 2009= STATFOR May 11 base STATFOR May 11 high STATFOR May 11 low STATFOR Feb 11 base STATFOR Sep 10 base Performance Plan Total en-route service units ('000) Performance Plan % 2.8% STATFOR May 11 base % 3.3% STATFOR May 11 high % 4.6% STATFOR May 11 low % 2.3% STATFOR Feb 11 base % 3.3% STATFOR Sep 10 base % 3.1% Figure 17: Traffic forecasts (Sweden) The Swedish part of s Performance Plan is assessed as not passing the Traffic forecast check Economic assumptions checks: As shown in Figure 18, the inflation forecasts submitted in s Performance Plan were taken from the National Institute of Economic Research. These planned inflation rates differ from the IMF average inflation forecasts (+2.3% p.a. in s Performance Plan compared to +2.0% p.a. in IMF). The main difference arises in 2011 (1.2 percentage difference). The inflation rate reported for the year 2010 (1.2%) also significantly differs from the inflation rate published by Eurostat (1.9%). The PRB calculates that the cumulative difference in the price base is 1.9 percentage point by Inflation Performance Plan 1.2% 3.2% 2.2% 2.6% 2.5% 2.3% 2.4% IMF April 2011 average 1.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Difference (percentage points) -0.7% 1.2% 0.2% 0.6% 0.5% 0.4% 0.4% Performance Plan (index, 2009=100) IMF April 2011 average (index, 2009=100) Figure 18: Economic assumptions (Sweden) The Swedish part of s Performance Plan is assessed as not passing the Economic assumption check Unit rate trend checks: As summarised in Figure 19, the planned annual reduction in the Sweden en-route DUR for the period (-3.4% p.a.) is slightly lower than the EU-wide cost-efficiency target (-3.5% p.a.). Sweden has decided to apply a top-down approach to cost-efficiency improvement, and excluding the EUROCONTROL costs from the Sweden en-route cost base, Sweden plans a -3.5% p.a. reduction in the en-route DUR over the period. Therefore the PRB notes that changes to the vember 18

20 2010 forecasts improve the planned reduction in the en-route DUR over the period (-3.4% p.a. compared to -2.4% p.a.). The PRB also notes that because the largest forecast reduction in the en-route DUR is in 2014 (-4.2%), an earlier phasing of the topdown approach adopted by Sweden would be more beneficial to the airspace users. Units Total determined costs (nominal terms) '000 SEK % 1.8% Inflation % % 0.0% 1.2% 3.2% 2.2% 2.6% 2.5% Inflation index (2009 = 100) % 2.4% Total determined costs (real terms) ' SEK % n/n-1 % 15.8% -5.9% 0.4% -0.7% -1.5% 1.4% -0.6% Total en-route SUs 000 SUs % n/n-1 1.5% 5.8% 2.9% 2.9% 2.8% 3.1% 2.8% En-route determined unit rate (national currency in real terms) 2009 SEK % n/n-1 % 14.1% -11.0% -2.3% -3.5% -4.2% -1.7% -3.4% 2009 Exchange rate 1 EUR= En-route determined unit rate (Euro in real terms) 2009 EUR EU-wide target % n/n-1 % 14.1% -11.0% -2.3% -3.5% -4.2% -1.7% -3.4% 2009 EUR % -3.5% Figure 19: Determined unit rate trend (Sweden) The PRB also notes that if the trend in the en-route DUR was calculated taking into account the one-off adjustment to EUROCONTROL costs for 2011, the forecast annual reduction would be -3.6% p.a., that is slightly better than the reduction in the en-route DUR presented in the Performance Plan (-3.4% p.a.) The PRB notes, however, that the 2011 en-route cost base is affected by a) the implementation of a new collective agreement which significantly impact on staff costs compared to 2009 (by 2014, staff costs are planned to be +22.7% above their 2009 level); b) a +15% increase in other operating costs due to rationalisation costs and c) a +29.7% increase in the cost of capital. Index of costs (2009=100) Staff costs Other operating costs Depreciation Cost of capital Figure 20: Costs by nature trend (Sweden) The PRB notes that although these rationalisation costs might be enablers to the planned decreases in other operating costs between 2012 and 2014 (-1.9% p.a.), the other operating costs in 2014 are planned to be close to their 2009 level. As a result, the planned annual reduction in the en-route DUR for the period (-1.7% p.a.) is significantly worse than the EU-wide cost-efficiency target (-3.2% p.a.). Despite the cost containment measures described in the Performance Plan, the PRB notes that the total determined costs are planned to rise by +7.0% between 2009 and In addition, it appears that, when converted into Euros, the EUROCONTROL costs reported in the Performance Plan are, by 2014, +6.8% higher than the EUROCONTROL costs planned by EUROCONTROL. The PRB also notes that between 2011 and 2014, according to the Performance Plan, the EUROCONTROL costs are planned to rise by +18.5% in nominal terms, while according to EUROCONTROL, the rise should be +11.0%. It is not clear from the Performance Plan whether these observed differences are due to the use of different exchange rates, or to different assumptions for the EUROCONTROL costs. The Swedish part of s Performance Plan is assessed as not passing the Unit rate trend check. 19

21 Unit rate level checks: As shown in Figure 21, Sweden s en-route determined unit rate in 2014 is planned to be 51.55, which is +16.7% higher than the comparator States unweighted average ( 44.17). If adjusted for differences in PPPs, the PRB calculates that the en-route determined unit rate for Sweden in 2014 would be just +3% higher than the unweighted average of the comparator States. On the other hand, the PRB calculates that using the 2011 exchange rate (calculated over the period running from 01/01/2011 to 12/07/2011) instead of the 2009 exchange rate would shift the Sweden s en-route DUR upwards by +18.5%. Determined unit rate ( ) Finland rway Poland Sweden Unweighted peer group average (excl. Sweden) Figure 21: Determined unit rate level (Sweden) However, since the proportion of gate-to-gate costs allocated to en-route (87.6% in 2014) is planned to be the highest among the comparator States (showing an unweighted average of 65.9% in 2014), The PRB estimates that if the peer group average share of enroute costs was applied to Sweden for calculating its en-route cost base, Sweden s enroute determined unit rate would be -12.1% lower than the average of comparators States in Combining the effect of cost allocation differences with the use of the 2011 exchange rate, the PRB calculates that the Sweden en-route DUR in 2014 would be just 4% above that its comparators Finally, the ACE 2009 Benchmarking analysis shows, however, that LFV ATCO productivity is below that of its comparator ATSPs and remains an area for improvement. The Swedish part of s Performance Plan is assessed as passing the Unit rate level check, with reservations Return on equity checks: The average RoE forecast over the period is 4.0%. The ATSP risk premium is 0.8% which is less than the EU average for ATSPs (2.6%) The PRB notes that the pre-tax WACC over the period used in Denmark- Sweden s Performance Plan is 0.8%, which is not consistent with the reported RoE of 4% since the PRB understands that LFV is almost entirely financed by equity. Nevertheless, the WACC remains much below the value used by the comparator States (5.8%) and much below the EU average (5.9%) However, the asset base per SU over the period is planned to be 111, which is 210.1% higher than the comparator States ( 36) and 113.1% higher than the EU-wide average ( 52). The PRB notes that the Performance Plan does not specify whether the relatively high share of net current assets in the asset base is likely to decrease beyond Given the magnitude of the current assets it would be important to ensure that no interest bearing assets are included in the capital employed. 20

22 12% Return on equity / state long term bond rate 10% Avinor 8% Finavia EU average 6% Peer group average 4% LFV PANSA 2% 0% Total assets per SU Average return on equity State long term bond rate, v Apr 2011 average (EU avg. excluding GR, IE, PT) Figure 22: Average Return on Equity and asset base per SU (Sweden) The Swedish part of s Performance Plan is assessed as passing the Return on equity check, with reservations Key points on COST-EFFICIENCY for Sweden: A. Sweden s Performance Plan is assessed as not passing the traffic forecast check. The traffic forecasts provided in the Performance Plan are the February 2011 forecast from the Swedish Transport Agency, which are very close to STATFOR February 2011 forecast. Information from the CRCO s monthly monitoring of traffic (see charts below) indicates that actual traffic in the first seven months of 2011 is +10.1% higher compared to the same period in 2010 (+7% excluding April data due to the Volcanic ash crisis in 2010). This is much higher than the planned increase in TSUs reported in the Performance Plan for 2011 (+5.8%). In addition, given that the SU forecast used by Sweden is systematically -1.2% below STATFOR May 2011 baseline forecast throughout RP1, and given the traffic risk sharing, the PRB computes that the Swedish en-route ATSP (LVF) could collect some 2.3 million per year of revenues exceeding its determined costs without having to return these revenues to airspace users. B. Sweden s Performance Plan is assessed as not passing the economic assumption check. The inflation forecasts submitted in the Performance Plan were taken from the National Institute of Economic Research. These planned inflation rates differ from the IMF average inflation forecasts (+2.3% p.a. in the Performance Plan compared to +2.0% p.a. in IMF). The inflation rate reported for the year 2010 (1.2%) also significantly differs from the inflation rate published by Eurostat (1.9%). The PRB calculates that the cumulative difference in the price base is 1.9 percentage point by C. The planned annual reduction in the Sweden en-route DUR for the period (-3.4% p.a.) is slightly lower than the EU-wide cost-efficiency target (-3.5% p.a.). Sweden has decided to apply a top-down approach to cost-efficiency improvement, and excluding the EUROCONTROL costs from the Sweden en-route cost base, Sweden plans a -3.5% p.a. reduction in the en-route DUR over the period. The PRB notes that changes to the vember 2010 forecasts improve the planned reduction in the en-route DUR over the period (-3.4% p.a. compared to - 21